Short sellers flag school stocks

Investors who make money by betting against troubled companies have started warning lawmakers that the for-profit higher education industry is abusing federal student aid to make a profit. But critics argue the so-called short sellers are only trying to smear the industry’s reputation in a bid to drive its stock prices down.

Two renowned short sellers have been lobbying lawmakers and administration officials, warning that for-profit schools are positioned for the same kind of crash that recently hit the subprime mortgage industry.

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Steven Eisman, a hedge fund manager who shorted the subprime mortgage market, testified before a Senate committee last week. And famed short seller Manuel P. Asensio’s new nonprofit group has written to Education Secretary Arne Duncan, asking him to investigate the business practices of a for-profit education company.

The Wall Streeters say the for-profit education industry’s growth has been fueled by government-backed student loans. Since students and the government, not the schools, bear the risk of default, for-profit colleges have every incentive to enroll as many students as possible, regardless of their ability to repay the loans, they argue.

Even worse, they say, the schools target the poorest Americans by promising a path to prosperity only to leave them with a subpar education that will not help them secure the better-paying jobs necessary to repay their student loans.

“Without the scam on the DOE, for-profits would not exist,” Asensio said in an interview. “It’s the worst product at the highest price.” He said the for-profits get the least-educated people, “who are most susceptible and are least capable of analyzing what they’re buying, to get on board.”

Asensio is president of the nonprofit, nonpartisan group Alliance for Economic Stability, which is aimed at creating a fair financial marketplace. He said he has never shorted the for-profit education industry. But, he said, he understands why some of his colleagues would.

“We don’t see any redeeming value for the for-profit education stocks,” Asensio said. “There’s no reason for them to exist.”

Eisman used similarly strong language, telling a Senate panel that the industry was “as socially destructive as the subprime mortgage industry” — and was sharply criticized for using his testimony to degrade the same industry he was betting against.

At the hearing, Eisman acknowledged that he has a financial stake in the industry and told Senate Health, Education, Labor and Pensions Committee Chairman Tom Harkin, “The reason why I’m here today is that it’s my hope that there’s still time to do something.”

“I don’t have an interest in them failing,” Eisman continued. “There are very bad things going on in this industry. I think there’s some very bad actors, and things should be done with that.” Short sellers make money by borrowing and then selling assets they think are overvalued, waiting for their value to decline before repurchasing them at the lower price and selling them back to the lender. The short seller pockets the difference between the higher sale price and the lower repurchase cost.